Persian Gulf oil producers face hard choices if Strait of Hormuz is closed

Virtually all of the world's spare oil capacity resides in the Middle East, with Saudi Arabia, the UAE and Kuwait holding more than 5 million b/d of idled production that can be quickly reactivated to offset disruptions, including from their embattled OPEC neighbor Iran.

But a closure of the critical Strait of Hormuz, as threatened by Tehran in recent days following US and Israeli missile strikes, would largely trap that oil in the Persian Gulf -- a calamitous scenario for producers and their customers alike, and one which still looms as a possibility despite US President Donald Trump announcing a ceasefire between Iran and Israel on June 24.

Kuwait, Qatar and Bahrain are wholly dependent on the strait as an outlet for their barrels, and while Saudi Arabia, the UAE and Iraq have pipelines that can circumvent the maritime chokepoint, shifting their exports wholesale to ports outside the Gulf would require logistical and operational swerves that are largely untested and not without their own risks.

"There is no other alternative for producers in the region, not for Kuwait, not for Qatar, not for Bahrain," Ali al-Riyami, formerly the director general of marketing at Oman's oil ministry and now a freelance energy consultant, said in an interview.

In all, some 20 million b/d of oil and products flow through the strait, along with significant volumes of LNG and other commodities.

For now, oil markets appear confident that Tehran will keep the Strait of Hormuz open, not least because a closure would be economically disastrous for Iran itself, which also relies on the waterway to ship its crude to its primary customer China.

But new technology could see GPS jamming and other electronic warfare that disrupts shipping through the strait in a much more targeted way than simply mining the channel or firing rockets at vessels.

"The most likely disruptive measures would be mines and cyber attacks," said Karen Young, senior research scholar at Columbia University's Center on Global Energy Policy. "But, as of right now, Iran seems to be choosing a more deliberate and less escalatory approach."

Alternative routes

For OPEC kingpin Saudi Arabia, the world's largest oil exporter, the key alternative to the Strait of Hormuz is the 5 million b/d East-West pipeline that connects the kingdom's main crude processing facilities to both the Red Sea coast at Yanbu and the Persian Gulf port of Ras Tanura.

State-run oil giant Aramco ships most of its crude out of Ras Tanura, with ship-tracking data from S&P Global Commodities at Sea showing an average of 5.3 million b/d in flows from the port in June to date, making it the top export loading terminal in the region.

Even a complete switch of the pipeline westward to Yanbu may not be enough to compensate fully for the Ras Tanura exports, though the pipeline has the capability to expand its capacity to 7 million b/d on short notice, as it did temporarily in 2019 following the Houthi attacks on Saudi oil processing facilities. However, such maximum throughput is believed to be untested, and the pipeline pumps 1 million b/d in normal times, said Robin Mills, CEO of consultancy Qamar Energy.

Saudi Arabia's Yanbu crude exports are averaging 608,000 b/d in June, and a floating storage ship, FSO Kristina, has loaded 14,000 b/d, the first loadings since December, CAS data shows.

Shipping from the Red Sea, however, has been perilous since November 2023, when Yemeni Houthi rebels began targeting ships in and around the Bab al-Mandab strait in solidarity with Hamas in its war with Israel.

Aramco could send its tankers north through the Red Sea and through the Suez Canal into the Mediterranean to avoid any Houthi attacks, but this would make exporting to key customers in Asia far more expensive.

"There is also the issue that Aramco can only send Arab Light and Arab Heavy from Yanbu because of the tank storage there," Mills said. In case of an emergency, they may have to blend in other grades, he said.

Egypt's 2.5 million b/d SUMED pipeline has also been used by Saudi Arabia to avoid the Bab al-Mandab.

Aramco did not respond to a request for comment on its plans, if any, if the Strait of Hormuz is closed.

Fujairah loadings

In the UAE, the Port of Fujairah outside the Strait of Hormuz is the terminus of the 1.5 million b/d Habshan pipeline that carries Murban crude from Abu Dhabi, which could be used as a workaround to the Ruwais, Jebel Ali and Zirku crude terminals inside the Persian Gulf.

But that pipeline capacity is less than the 3.5 million b/d of crude that the UAE has exported in recent months, according to Commodities at Sea data. ADNOC supplies most of the UAE's crude, which besides the light sweet Murban includes heavier grades such as Upper Zakum, Das and Umm Lulu.

"ADNOC could shift about 1.8 million b/d to Fujairah," Mills said. "Although for now they can only send onshore crude to Fujairah."

The UAE has been preparing for a potential Hormuz closure by developing massive caverns in the mountains of Fujairah as crude storage, with a total capacity of 42 million barrels and plans to expand further.

ADNOC officials have been tight-lipped on the caverns' operational status and fill levels, and the company did not respond to a request for comment.

"They already use Fujairah for most of their exports, so it certainly looks doable [to avoid the Strait of Hormuz," Mills said.

Iraqi pipelines

Iraq, the second largest producer in OPEC, ships almost all of its crude from its main terminals in Basrah in the Gulf. Its 450,000 b/d capacity northern pipeline to Turkey (ITP) has been shut since March 2023 due to disputes with the Kurdistan region, though Turkey has proposed new pipelines from Basrah to Ceyhan.

"The potential is there to push for ITP opening and break the deadlock" should the strait be shut, said Shwan Zulal, managing director at KRG-focused Carduchi Consulting.

But lingering issues like payment of past debt, Baghdad withholding salaries to the Kurdistan Regional Government, and a deadlock over other terms would make it a hard sell.

"It's not an easy issue to solve between the parties in a short time, therefore it will not be a quick fix to open ITP unless in the unlikely event of the strait being shut for a prolonged period of time," Zulal said.

Iraq is looking for alternatives to the strait, oil minister Hayan Abdulghani told local Al-Sharqiya News, without elaborating on its plans.

Turkey's proposed new pipelines would carry oil and natural gas from Iraq's resource-rich Basrah region to Ceyhan, a move that would allow Baghdad to get more of its crude to market while furthering Ankara's plans to transform itself into a major regional energy hub.

Turkish energy minister Alparslan Bayraktar revealed the plans in April to S&P Global Commodity Insights, saying that an operational pipeline that now runs from Silopi in southern Turkey to Ceyhan needs to be connected to Basrah fields to reach its throughput of 1.5 million b/d, largely skirting the Kurdistan region.

Targeted attacks

For the rest of the major producers in the Gulf, including Kuwait, Qatar and Bahrain, alternatives to the Strait of Hormuz are nonexistent. Qatar, Kuwait and the Neutral Zone shared by Kuwait and Saudi Arabia exported a combined 2.4 million b/d in June, according to CAS data.

QatarEnergy and Kuwait Petroleum Corp. did not respond to queries, while Bapco Energies declined to comment.

Iran itself exports 1.5 million b/d mainly from Kharg Island in the Gulf, with a second facility at Jask on the Sea of Oman under construction.

All these logistical constraints would lead to a near-immediate supply squeeze in the oil market in the event of a strait closure, causing prices to skyrocket.

In the meantime, maritime authorities, including the UK Maritime Trade Operations, have reported increased electronic interference near Bandar Abbas in the Strait of Hormuz and several other areas in the Persian Gulf.

Some tankers are now rerouting to avoid the strait. CAS data indicates that 709 unladen crude and product tankers were destined for the eight countries with oil export facilities in the Gulf as of June 23, down from the day-ago level of 721, and the daily average of 743 on June 15-21.

"Most analysts are looking at the scenario of a short-term reduction in flows, and not all flows, meaning that Iran would target specific flagged tankers by destination or origin, and that in the event of just Iranian flows being disrupted, we could see a partial drop in exports out of the Strait," Young said.

Young said that most analysts are looking at a 50% reduction that would have a limited, short-term price impact, potentially pushing prices over $100/b.

Platts, part of S&P Global Commodity Insights, assessed Dated Brent at $77.66/b on June 23.